Whatever that is.
Anyway, John Quiggin is salivating at the implications of the current schemozzle for ‘neoliberalism’. It’s finished he reckons. So too the ‘Washington Consensus’. I have my doubts. I guess some of the worst excesses of this time around will be a cause for lessons to be learned. But as for something more fundamental?
I was going to try to articulate my doubts a bit more fully, but haven’t the time. But I do have the time to link you to Steve Randy Waldman’s more pessimistic view. Of course I expect Steve Randy Waldman’s perfect world would be quite different from John but that aside, I think SRW’s (what am I supposed to call this guy – ‘Steve’, ‘Randy’ or ‘Steve Randy’ – what is it with these Americans?) presumptions about how the world works are more consistent with my experience of the world than John’s.
You see rather than be cured, these things metastasise. People have been dancing on the grave of the Washington Consensus for a long time. But it keeps reinventing itself, most recently in the ‘institutions’ view of development. There’s nothing terribly wrong with quite a bit of the Washington Consensus or the ‘institutions’ view. But these perspectives should be starting orientations, rather than formulas for fly-in fly-out fixes. Imposed in a Procrustean way their results are often disappointing, and sometimes disastrous.
The fondness for dogma, rather than trying to figure out in a pragmatic way what the issues are and the most efficacious ways of dealing with them – a pragmatism proposed by people like Dani Rodrik (one economics many recipes) – will metastasise again and again. Add to this the rampant mixture of corruption and log rolling that is American politics and it’s hard to see much that is particularly terrific coming our way. But no doubt some of the problems will be cleaned up – like the Savings and Loans problems of the 1980s ;).
I think this is the root of the problem. There haven’t been any serious consequences for US politicians as yet, and nothing is going to change until there are. Both sides of US politics are right wing and in the pockets of various corporate/plutocrat interests. The sponsors of the politicians don’t really care whether the Republicans or the Democrats are in charge.
Most of the current crop of politicians and their plutocrat sponsors look like they’ll survive the current crisis, so while there may be some fiddling at the edges, there won’t be any fundamental change.
How John Quiggin attribute the failure of Fannie and Freddie to free markets or “neoliberalism” when the guts of the problem – the sub-prime loans – were politically driven?
Add to that the element of moral hazard because the players confidently expected a repeat of the Savings and Loans bailout.
Given the corruption in US politics then the only feasible solution to chronic government failure is to get the government out of the marketplace along the lines proposed by classical liberals. By getting out of the marketplace I mean getting out of discretionary intervention (orders) and reverting to the policing of rules.
That way the regulations can be framed, tested and modified so they actually work for the benefit of everyone and not just for special interest groups.
Rafe, this may have some meaning to you, but to me it just sounds pathetic.
Where do there rules come from, who administers them, and what prevents the corruption of them?
And where’s my pony?
SJ,
You don’t get it. You have a rollicking, logrolling, deal doing democracy. So you make up some rules and then everyone kind of settles down and, well sticks to the rules. What’s not to like about that theory?
Actually Rafe puts it in a very transparent way, but this is basically Hayek’s political theory. It’s a political theory with the politics taken out. Now I really do have a very high regard for Hayek, but his theory of politics is basically all normative. It is in this sense ‘idealistic’ – in a pretty naive kind of way – it sets out some ideas, says the world should run itself according to them rules and has bugger all to say when it exhibits the troublesome tendency not to go like this.
The corresponding Monty Python sketch.
A small side note on institutional literature, or specifically the band-aided Washington Consensus view is how little effort is often put into describing the institutions that would be good; universally of course, since they are saving a universal rule system. A rulebook for capitalism rather than some guidelines for capitalisms.
Often the effort is outsourced to the creators of indexes, which are amazingly arbitrary. Its often very difficult to find the methodology behind them, but your basic “protection from expropriation index” etc. ends up being made by aggregating the subjective judgements of one or two people into a decimal figure. In the case of the Corruptions Perceptions Index, it seems to correlate mainly with a google search for “<> AND corruption”. Interesting crowd sourcing, but perhaps less than useful when the people perceiving the corruption have no computers…perhaps due to corruption.
And this is only with formal institutions, they often don’t even mention non-formal institutions (like basic market trust for instance), even though I think the formal sort rely on the latter.
In the end, they seem to propose that good institutions bring wealth. Therefore good institutions must look like those in wealthy countries.
And lo and behold, empirically we find that wealthy countries indeed have insitutions found in wealthy countries.
In my honours research, I did find an exogenous real life variable to represent institutions that was robust to natural resources and trade orientation and such and such.
This variable now gathers dust on a shelf like honours research was made to do.
R.I.P
Hayek and classical liberalism have plenty to say about the problems that arise when the rules are defective, or don’t work, or are subverted by political operators. Of course I can’t explain that in a few paras but don’t pretend that the current situation represents a failure of markets or the principles of classical liberalism because it is better explained as a failure of government and the mischief done by political interests in the absence of a clear understanding of the difference between government by rules and government by orders. Just for starters, there is not a lack of regulation, there is such a volume of regulation that it probably needs to be radically simplified.
To some extent the free market is doing very well, its Wall St that is finished;
Rafe,
I wonder what you mean by the idea that the sub-prime loans business was ‘politically driven’. There were politics around the rules constantly, it’s true. But the fact is – isn’t it? – that there were no effective rules preventing lenders from lending to people who obviously couldn’t afford the loans (I’m not even necessarily saying there should be, but the fact is that what rules there were in this regard were ineffective.) There were no rules effectively constraining financial entrepreneurs from packaging up the loans into impenetrable financial instruments. You’d think that the lack of transparency of the instruments would have done these instruments in, but not a bit of it.
Now to a substantial degree that’s what’s behind the crisis. There are no doubt other things in the ‘witches brew’, but those two absences of regulation are at its core.
I really wonder sometimes Rafe, I wonder what it would take to get you onto the other side of one of these debates. Was it poor regulation and a similar ‘witches brew’ of nasties that delivered the south sea island bubble, the tulip mania? The Melbourne property boom of the 1880s? Or was it that free markets have some weaknesses that (gasp) policy can correct to some extent?
I think Rafe has fallen for the CRA myth.
Quiggin has it wrong. It was the quality of regulation that was at fault.
look how our regulators interpreted Basle2 for example.
Our Banks had much more capital and sub-prime loans are unknown in Australia for good reason.
Only the charlatans went near and forced those borrowers mostly to put up property to get a loan.
No credible liberal in modern times has suggested that markets work perfectly so it is not helpful to intimate that I am opposed to better policy.
The challenge is to put in place policies that actually work without doing more harm than good. The record appears to support the view that interventions in the market do not work, unless you have a broad definition of interventions to include formulating and policing “rules of the game” to minimise force and fraud, secure property rights and other good things. It is in the area of rules of the game that people from the different “sides” can meet on common ground and cooperate.
I don’t know what sort of regulations can be put in place to stop people trying to borrow more than they can afford. One of the functions of a well functioning market is to send signals to people who make mistakes so they are encouraged to learn and do better in future. The message of the Savings and Loans bailout was that the government will reward silly decisons by borrowers and lenders. So it is happening again. How surprising is that? And how desirable it it to send the same signal again?
On the topic of transparency, it is my understanding that McCain co-sponsored a regulatory proposal what would have brought into the open the extent of bad loans on the books of Fanny and Freddie. It is alleged that the proposal was blocked by the Democrats in the Senate committee. If that is the truth of the matter, then on the face of it you should in in favour of the proposal, whoever put it on table.
Please don’t suggest that I am a McCain/Republican supporter, you must know that I abhor the bipartisan stance on rafts of unhelpful intervention and big government. It is just a matter of applying the same rules to both sides and giving credit to each side when it is due.
“I dont know what sort of regulations can be put in place to stop people trying to borrow more than they can afford”
It’s been suggested more than once that such regulations are essentially already in place in the U.S., but regulators where either deliberately turning a blind eye, or were unable for whatever reason to enfore such regulations (laziness, incompetence, insufficient resourses, or maybe dodgy lenders had just got too clever at hiding their actions…).
Many of the subprime loans that were made appear to involve some amount of fraud, or at least falsely convincing a customer that they would be able to afford such a loan.
However it does seem there are substantial differences in regulations covering capitalisation requirements for lenders between Australia and the U.S., which helps explain why Australian banks have largely escaped unscatched.
FWIW, here’s another article that goes into some detail of where lack of sensible regulation has a major contributing factor towards the crisis:
http://www.nytimes.com/2008/09/27/business/27sec.html?_r=1&hp&oref=slogin
Youre a bit cryptic, Richard Green. You want rules for capitalism. Rafe wants rules of the game too. So lets get the rules organised.
Good rules for capitalism will be the good rules for a political system. You can’t have one without the other. So dictatorship is out; it has to be a democracy yes?
In that case, it has to be a parliamentary system. Presidential (executive not answerable to legislature) always falls into dictatorship.
The USA is the exception; it has not fallen into dictatorship. But it periodically goes nuts: civil war, depression, social Darwinism, depression, McCarthyism, Vietnam, Iraq these alongside the murder rate, incarceration rate, religiosity and underclass exploitation and doubtless other loopy features.
The present crisis will eventually fade. As a result there will be some good rules installed. But only some. And these half-baked fixes, whatever they are, will sooner or later be undone by some future administration for ideological reasons or to keep the cronies on side.
Relatively good rules for capitalism are in place elsewhere in the West but they will never be institutionalised in the US because it has a relatively bad system of government.
Good institutions, Richard Green, we can do. Trust may follow them. Without them there wont be trust. For example, the American knowledge that human nature is immutably bad is intrinsically self-fulfilling and the presidential system guarantees its fulfilment.
In short the situation in the US re rules of capitalism is hopeless. The wretched citizenry can only hope for some mitigation through international pressure in a globalised world.
My quote of the week.
Couldn’t have put it better. I understand that we all have our biases. If you’re “a little conservative” to quote Gilbert and Sullivan it’s hard not to have an instinctive sympathy for conservatives of other countries and ditto “little liberals”. But when one side goes nuts for a while, then you can tell those who let their ideologies do all the talking.
McCain is another turkey, a kind of high class George W.
It isn’t. In fact, as MichaelK refers to, it was imposed by government through the Community Reinvestment Act and its modifications. Reality check time – who in their right mind would lend to those who can’t pay it back?
What is this crisis, but those instruments being ‘done in’?
The various historical bubbles you refer to are not ‘weaknesses’ – no-one claims relatively free markets deliver absolute macroeconomic stability, or that busts can be banished, or that companies and individuals won’t go broke. Instead, the freer the market, the better the self-correcting mechanisms can kick in, and the sooner things can return to the long-term trend.
I might be wrong but I thought that half the point, as fatfingers points out, was that Congress produced a decade or so of regulatory incentives to try and get more and more marginal people into houses.
Also, another interesting angle is the extent to which the secondary problem (ie the securitisation) can be characterised as regulatory arbitrage – regulated entities such as insurers and banks swapping regulated credit-risk for unregulated liquidity risk (ie buying high-liquidity-risk low-credit-risk senior RMBS tranches).
But Steve Randy Waldman is quite good, I think – from my perspective of rather limited information, he seems quite persuasive.
What exactly does “regulatory incentives” mean though – other than there being less regulation over who lenders could lend to, and what methods they could use to sell loans? And by “politically motivated”, are you suggesting that governments deliberately loosened regulation for the purpose of winning of votes?
Unless of course fatfingers is referring to the CRA of 1977, which effectively requires that banks lend to all sections of their community. But why would an act passed in 1977 cause a crisis in 2007? Especially given that there’s evidence that CRA was losing force in recent years.
I think Acts can be amended, NPOV, and that you are smart enough to know this.
Hey look, in the mid-nineties, the CRA was amended!! And the focus of the amendments was to encourage further lending in urban and distressed rural communities, through securitisation of mortgages (ie that famous transfer of risk thing). And what evidence – that there were no more conceivable candidates for houses, ie adults able to hold a pen?
Actually, in Clinton’s defence, one argument is that there was not enough securitisation – ie if CALPERS held $200nb of RMBS which are worthless at current mark-to-market prices, it wouldn’t be a huge deal, because CALPERS can hang around and wait.
And further, later in the nineties, Fannie and Freddie, completely on their own without any encouragement from Washington, decided to lower the standard of mortgages they would accept for securitisation and get on board the sub-prime bandwagon, thus helping really accelerate this whole ‘houses-for-poor-people’ thing.
Sure Patrick, but I’ve read quite a few articles examining the claims that either the CRA or Freddie/Frannie Mac have contributed to the crisis and the the near universal conclusion seems to be that a) CRA really had virtually nothing to do with it and b) there are lots of problems with F&F Mac, but those institutions weren’t responsible for a large percentage of the problematic subprime lending.
At any rate, I don’t still only understand the “politically motivated” suggestion, which to me implies that “politicians doing whatever they can to win votes” are to blame.
That wasn’t my suggestion.
I haven’t seen many of those articles, I have to admit!
Ok, but Rafe explicitly claimed that sub-prime loans were politically driven. I’d like to see some evidence for such a claim, or at least a clarification of what he means by it. AIUI, most sub-prime lending was by independent largely unregulated lenders. And the reason these small lenders were able to obtain the finance to supply the loans was as much as anything because the loans could be packaged up in such a way as to look far less risky than they were. Hard to see how that chain of events is “politically driven”.
Heh…The Age online is currently trumpetting: “Aussie market cops hiding”.
Given all the talk there has been about regulation and lack thereof, I initially parsed this as meaning that “market cops” (i.e. regulators) are in hiding…and seriously initially thought this was supposed to be some sort of explanation for the current market woes…
well not really, the lending was driven to a large extent by Fannie and Freddie’s willingness to repurchase the mortgages. This is the whole point – lenders were not making these loans in the expectation of carrying them themselves!
…and to that extent I’d agree that the role of F&F was somewhat significant, and that had attempts to better regulate it (yes, proposed by Republicans including McCain) succeeded, the crisis might not have been quite as bad.
BTW, do we have a number as to the percentage of subprime mortgages that were repurchased by Fannie or Freddie Mac?
I also wonder what percentage of the total “toxic assets” now clogging the financial system are based on subprime mortgages, as opposed to, say, unredeemable credit card loans etc.?
Ok, from here, the “size of the total subprime market is estimated by Reuters to be about $500 billion”. From elsewhere, it seemed that between them F&F held something close to $180 billion worth of subprime mortages. So it’s fair to state the F&F were “heavily” involved in subprime mortages, though of course we don’t know what percentage of F&F subprime mortgages are bad ones (ones that have defaulted or are almost certain to do so).
But what percentage of them would the proposed regulation have prevented? If we’re generous and suggest as much as 50%, at best that regulation would have reduced the scale of the subprime problem by about 10%, and done nothing about other toxic assets that aren’t based on subprime loans.
BTW, interesting article from last year in the WSJ demonstrating how lenders repeatedly lobbied governments (more at the State level than the Federal level, interestingly) to relax regulations over who they could lend to:
http://online.wsj.com/article/SB119906606162358773.html
Still haven’t managed to find anything indicating what percentage of bad debt wrapped up in CDOs is subprime mortgage debt. The general assumption however seems to be that it was most of it.
I note from that WSJ article that at least one legislator claimed that they were voting to ease regulation “to make it easier for people to own homes”. Perhaps they really believed it, in which case there were at least three pressures leading to decreased regulation: “free market” ideological grounds, industry lobbying, and belief it would help poorer families to own homes (which could be labelled as a facet of an ideological position that that governments should do what they can to assist the poor, but usually that position implies they should actively intervene into the market).
I wonder if McCain and the Republicans were also hopping into Fannie and Freddie because some in the industry regarded themselves as facing unfair competition (which they were!).
Which seems fair enough to me – if I were a legislator and industry players were able to convince me that existing laws were preventing fair compeition, I’d be willing to support modifications to such laws. Sure, it’s a form of industry lobbying, but the sort of lobbying I was alluding to in my previous post was the “you pass this legislation and we’ll do this for you” (where “this” is often “donate to your campaign”) type lobbying…or worse…”you fail to pass this legislation and we’ll do this to you”.
Curiously, at least one economist (Adrian Blundell-Wignall) is claiming that a “regulatory crackdown” on F&F Mac in 2004 was a significant cause of the crisis:
http://www.theaustralian.news.com.au/story/0,25197,24048781-30538,00.html
But it’s not clear exactly what crackdown he’s referring to, or why the problem wasn’t the fact that other lenders were not subject to the same “regulatory crackdown”.
I’ve also read opposite accounts of the degree to which the Basel II agreement is responsible: some (including Blundell-Wignall) claiming that it “reduced capitalisation” requirements which lead to irresponsible lending practices, others claiming stricter accounting rules are part of the reason that credit is frozen up, hence worsening the crisis.